For years, Chris Tobe has been warning anyone who’ll listen that Kentucky is digging itself a deep hole.
Multiple administrations and General Assemblies deferred payments to public employee pension funds, an unfunded obligation that now tops $30 billion.
A lot of states failed to fully fund their pensions even before the Great Recession set in, “but Kentucky and Illinois … they’re by far the worst,” Tobe told me recently.
With the exception of CN2 Pure Politics reporter Ryan Alessi, who was a Lexington-Herald Leader print reporter, no one in the state media has much paid attention.
State officials have labeled Tobe as a crank despite the fact he was a trustee for the $13 billion Kentucky Retirement Systems for four years, and part of the KRS investment committee.
After Tuesday night’s Jefferson County Board of Education meeting, though, Tobe’s warnings may be starting to register with community leaders and business leaders.
Per the request of Board of Education member David Jones, Jr., Cordelia Hardin, JCPS CFO, laid out for board members what she knows about JCPS’s portion of teacher retirement fund debt and what financial strains might be coming for the 100,000-student system.
Jones, chairman and managing director of Chrysalis Ventures, a Louisville-based venture capital firm, said he requested Hardin explain the pension issue to the board as part of the JCPS budget discussion.
“I think it’s simply good governance to be transparent with voters. We have to get this pension issue out in the public and understood,” he said.
As of 2015, changes in accounting rules force governments and school systems to start booking unfunded liability obligations such as teachers’ pensions, Hardin told board members during Tuesday’s regular meeting.
JCPS employees including teachers, administrators and support staff belong either to the Kentucky Teacher Retirement System or to the County Employees Retirement System, part of the larger Kentucky Retirement System.
Under CERS, JCPS’s exposure could be anywhere from $200 million to $500 million, Hardin said.
The CERS fund JCPS belongs to was 61.3 percent funded in 2012, up from 58.9 percent in 2011.
JCPS has paid its required contribution for CERS year after year, Hardin said. So it’s unclear as to what portion, if any, JCPS will pay.
In Kentucky, teachers contribute to pensions, but school systems don’t make direct contributions. Instead, pensions are funded by property taxes, Tobe said, money that was diverted in Kentucky to cover budget shortfalls elsewhere.
KTRS is far worse off than CERS at about $11.6 billion under-funded.
Jones said he doesn’t fully understand the relationship between KTRS’s unfunded liability and accounting rules, having heard different views about whether KTRS’s obligation will continue to be recorded solely at the state level.
“If JCPS were to have to book its percentage of this liability, though, it would be a big number,” he said.
That big number could throw JCPS into a budget crisis.
The state requires JCPS keep at least 2 percent of its $1.2 billion budget for expenditures in reserve.
At this point, JCPS has a $125 million reserve, Hardin said. If the system were suddenly required to pay a $200 million pension obligation, it could wipe out that reserve, leaving the system with a $75 million deficit.
That could lead to the state possibly taking over the school district, she said. When I asked her with whom in state government she’s consulted concerning the pension issue, Hardin said, “No one.”
If the system were required to replace the reserve, it would take another $22 million, for a total deficit of $97 million.
“That’s a fairly big gap,” Jones noted.
The state can raise property taxes by a maximum of 4 percent. For JCPS, that would equal only an additional $17 million per year.
And that would leave JCPS officials with a limited number of options as administrators head into negotiations with the Jefferson County Teachers Association union.
At the meeting, Debbie Wesslund, the District 3 board member, said JCPS “will have no place to go but to taxpayers, or to make cuts.”
Tobe said in an interview Friday that $200 million is much lower than JCPS’s likely obligation.
JCPS is actually part of four separate funds – CERS pension and CERS health benefits, KTRS pension and KTRS health benefits.
The future of retirement health care benefits is unclear, Tobe said. But pensions are sacrosanct because teachers contribute to them under what the courts have ruled is a binding contract.
Pensions would be at the top of the claims hierarchy should the state default on its pension promises, Tobe said.
JCPS’s likely total obligation as a percentage of the state’s total $30 billion public pension shortfall is closer to $2 billion, Tobe said.
Though KERS could be out of money as early as three years from now, Tobe estimates the teachers retirement funds aren’t likely to run out of money for about six years.
At which time some entity – the state or local school systems – will have to come up with money to keep writing those retirement checks to teachers.
“This isn’t the end of the pension crisis,” Tobe said.
“This is just the beginning.”